Interpreting Middle East Economic News and Analyzing Market Trends

UAE government moves to decriminalize bounced checks, HSBC cries foul

The UAE government is moving closer to international standards for bank checks with a move to decriminalize the bouncing of checks.  It is currently a criminal offense to bounce checks in the country, which can lead to a prison sentence.  During the height of the financial crisis, many Emiratis and expatriates were thrown in jail for bouncing checks, which were used as security deposits on properties and to guarantee loans.  Emiratis, however, were given immunity from serving jail time for bouncing security checks last October. The move comes as the number of bounced checks has been falling, yet not all banks are willing to give up this practice.  Here’s more from a recent article in The National newspaper:

A new move to decriminalise bounced security cheques could backfire without a federal credit bureau in place, a top banker has warned.

It comes as other banks point to a rise in Emiratis missing payments on unsecured lending, which includes credit cards and personal loans, ever since a presidential decree immunised Emirati borrowers from going to jail over bounced security cheques.

If they are barred from using cheques as a security measure, banks may become unwilling to lend to individuals, said Rick Crossman, the head of retail banking and wealth management at HSBC Middle East.

“It’s not that all lending would stop, but certainly there would be a restriction,” he said. “If you start taking out tools to manage the risk without replacing that with something else, just by default you’ll have less lending.”

A consensus has developed among banks that the UAE must move away from the use of cheques as a payment method, with banks, including Emirates NBD, saying that they support a decriminalisation of cheques for all.

  Local banks, such as Emirates NBD are on board with this move to do away with the security check system, but ironically HSBC, a leading global bank, is not ready to give this up.  One would expect HSBC to be a champion of international practices.  Instead, the bank prefers holding the threat of jail time over its clients.  The article continues…

The UAE’s move towards international standards on cheque defaults required additional measures to strengthen banks’ oversight of their lending books, Mr Crossman said.

“We’re very supportive of the local laws and we adhere to all local laws,” he said. “But we believe there are some infrastructure improvements that need to take place to allow banks to lend in an appropriate way in this market without the use of security cheques.”

Bankers agree that the formation of a credit bureau would be a prerequisite before cheques could be decriminalised for all residents.

“I believe what would be an unintended consequence of doing away with security cheques ahead of a robust credit bureau would be that you could potentially see a contraction of lending,” Mr Crossman said.

Reluctance on the part of banks to use civil courts has created problems in the past, with criminal action viewed by many lenders as a faster and more effective way of recovering money owed to them.

But dozens of bank customers fled the Emirates during the financial crisis when lenders threatened them with cashing security cheques – potentially leading to jail time – rather than agreeing to renegotiate terms. The result was an increased level of bad debts in the financial system.

If banks aggressively pursued customers, it would likely represent lost business in the future, Mr Crossman added.

You can read the full article from The National.


So HSBC wants to adhere to local laws when they suit it best.  Calls for a national credit bureau are baseless.  In 2006, the UAE setup a credit bureau called Emcredit for individuals and companies and was supposed to require all banks to report credit data years ago.  According to a Reuters article in 2009, Emcredit was to have collected bank data on 60-70% of the banking population by end-2009.  The bureau has been around for over 6 years.  Why aren’t banks using the bureau instead of continuing with the security check system?  There could be several reasons, but one reason I’m sure is because holding a security check is a much more powerful tool to hold over clients than a mere credit report. HSBC’s strategy here is to use threats to maintain the status quo by saying that decriminalizing check bouncing would cause a contraction in lending.  These tactics should come as no surprise from a bank engaged in money laundering for drug cartels (click here to read Bloomberg article).  A more ethical response would be for banks to start lending responsibly.  Yes, lending will contract, but banks would be lending to clients that can easily repay their debts.  Clients will only borrow what banks comfortably believe they can repay.  The “loss of business” HSBC’s Crossman is crying about is the loss of predatory lending capabilities.  The security check system as it is in place today is no more than a predatory lending tactic.  It’s easy to see why banks love this system. For related posted, please consider reading: Saudi Arabia and the UAE handle bad debts differently, yet both come to the same wrong conclusion UAE Central Bank Holds Off on Tougher Regulations Stating Banks are in a Good Position